Pharmacy sales – dispensing with stock valuation disputes
When a pharmacy is sold, whether by an asset or share sale, the sale terms usually provide for the buyer to pay a purchase price plus an amount for the stock as valued by a jointly appointed valuer. Whilst the valuation is usually said to be binding on the parties save in the case of manifest error or fraud, I have seen a few recent disputes about stock valuations. Here are my top 10 tips for arranging valuations and avoiding disputes about the stock valuation:
1. Before purchasing, the buyer should inspect the stock to ascertain what they are being asked to purchase and its quality, and ask for an indication of the stock value so they can budget for it.
2. The buyer should not be afraid to ask to exclude from the sale, or negotiate discounts on:
- Excessive stock – a buyer recently complained of a pharmacy having excessive volumes of acrylic wool which they considered to be unsaleable but had not thought to ask for this to be excluded from their purchase.
- Wholesale stock – if the seller has sold wholesale and the buyer is not keen to do so, the buyer could ask for this stock to be excluded.
- Left over seasonal stock such as Christmas or summer items which the buyer may have difficulty selling.
- Obsolete stock.
- Slow moving stock – some expensive items may have a long shelf life but may be slow moving and kept for occasional use, so a buyer may want to ask to exclude these items or agree a discount on them.
3. Agree the definition of ‘Stock’ so that the parties are clear as to what this does and does not include.
4. Agree a method of stock valuation – usually the parties agree for a valuer to be jointly appointed to conduct a physical stock-take on the day of the sale or as close as possible to it – this is important given that stock levels change on a daily basis. The valuation is usually said to be the lower of cost price (being invoice prices which should be net of customary and standard trade discounts) and net realisable value. Net realisable value is often determined by the valuer by adopting industry standards and should ideally take into account, at the valuer’s discretion, any obsolete or excessive stock or any stock that has less than 3 months shelf life – it’s preferable for this to be set this out in the sale agreement.
5. Agree a valuer – both parties should be satisfied as to the credentials of the valuer to be appointed. Ask about their experience and how they will go about the stock valuation. You need to be confident that they are reputable and experienced so that you’ll receive a professional and accurate stock valuation that results in a realistic stock valuation. Ideally the valuer should be named in the sale document. The valuer should be independent and if possible should not have had prior dealings with either party to reduce the possibility of bias – any prior involvement should be disclosed by the parties.
6. Request a sample valuation from the valuer so that both parties know what level of detail to expect for the price agreed.
7. Ensure the instruction is done jointly. In practice it is likely to be the seller who takes charge and instructs the valuer as they are most keen to receive payment. This often leaves the buyer in the dark as to exactly what instructions the valuer has received even though the buyer will be required to share the cost of the valuation. A buyer should make sure they are involved and that the instructions reflect the terms agreed by the parties.
8. Attend the valuation – if possible, representatives of both parties should attend during the stock-take to see for themselves how the valuer is approaching it and to answer or ask any questions. The seller will need to provide the valuer with access to its records. If you are not present, it is difficult to later argue that there has been an error with the method used.
9. Review the valuation – once provided, the parties should carefully review it and immediately raise any queries with the valuer. I have known valuers to include whole categories of stock which should not have been, for example items relating to a post office rather than the pharmacy. This could be missed if the buyer simply accepts the valuation as provided.
10. Once the valuation has been received, if one party complains that an insufficient breakdown has been provided, you can compare this with the sample valuation requested at the outset and if appropriate ask for further detail. Whilst a buyer might expect a fully itemised list of all stock, the reality is that you get what you pay for –valuers often charge a relatively modest fee to each party and do not spend long enough at the premises to be able to prepare a fully itemised stock valuation – they will simply give valuation figures for broad categories of stock such as patent medicines, toiletries and put anything miscellaneous into a ‘sundries’ category. This is where you are required to trust the experience, discretion and impartiality of the valuer hence the importance of carefully selecting them at the outset.
For more information contact the commercial dispute resolution team.